Foreign-Direct Investment and Economic Growth in Malaysia

This research proposal focuses on the relationship between foreign-direct investment (FDI) and economic growth in Malaysia. It reviews the background study of Malaysia's FDI history flow, changes, and challenges. The research aims to investigate and analyze the key features between the relationship of FDI and improvement of economic sustainability and development. The research will also analyze the key FDI determinants in Malaysia's economy and how to effectively utilize the available resources for their improvement.

Foreign-Direct Investment and Economic Growth in Malaysia 1
THE RELATIONSHIP BETWEEN FOREIGN-DIRECT INVESTMENT AND ECONOMIC
GROWTH IN MALAYSIA
Student’s Name
Professor Name
Institution Name
City
Date

Foreign-Direct Investment and Economic Growth in Malaysia 2
Table of Contents
Introduction......................................................................................................................................3
Research Background..................................................................................................................3
The significance of the Research.....................................................................................................4
Research Questions..........................................................................................................................5
Research Objectives and Framework..............................................................................................5
Literature Review............................................................................................................................5
Literature Review on Foreign Direct Investment (FDI)..............................................................5
Literature Review on Economic Growth in Malaysia.................................................................7
Research Methodology and Design.................................................................................................9
Data Resources............................................................................................................................9
Data Analysis Method.................................................................................................................9
Hypothesis.................................................................................................................................10
Limitations.................................................................................................................................11
Ethical Considerations...................................................................................................................11
Expected Outcomes.......................................................................................................................11
Timeline and Gantt Chart..............................................................................................................12
References......................................................................................................................................13

Foreign-Direct Investment and Economic Growth in Malaysia 3
The Relationship Between Foreign-Direct Investment and Economic Growth in Malaysia
Introduction
The contribution of (FDI) in the growth of economy has been one of the most important
aspects in most countries especially the developing countries. Through the increase in financial
constraints in most economies around the world, FDI has been one key element which has
considerably boosted and sustained most of the economies today (Wang and Wong, 2009). On
the other hand, as compared to other Southeast Asian Nations, Malaysia economic growth has
continued to flourish in the past decade where its Gross Domestic Product (GDP) was highest in
the region. Despite this, like in most developing nations Malaysia economic development has
been greatly boosted by FDI inflow (Anwar and Sun, 2011). Through this, my research proposal
will be focusing on researching the link between the economic development of a recipient state,
i.e. Malaysia, and the impact FDI. In this part, I will focus on reviewing the background study of
Malaysia Foreign Direct Investment history flow, changes, and challenges.
Research Background
The topic of the relationship between major countries growth and the impact and/or
contribution of FDI in continuous development growth has been one of the overwhelmed topics
in economy today. With increased awareness on the topic, policymakers have also continued to
improve on methods of which would enhance FDI in various sector example such as tax
incentives and export processing zone (Meyer and Sinani, 2009). On the other hand, FDI
determinants in various countries always tend to differ in various aspects, therefore, it also
causes different effect and challenges in various economy approaches. Example, during the 2007
economic crisis, Malaysia economy was reported to be the 29th leading economy around the
globe with a GDP of approximately 357.9 billion dollars. This, therefore, explains Malaysia
strength on commodities downturn in sectors such as the oil and electronics has a very limited
impact on the entire economy sustainability. Majorly, the continuous FDI improvement in
Malaysia has been widely contributed by the policy reform in the enhancement of FDI
determinants e.g. “Export Incentives with Open Policy in the 1980s” (Zhang and Daly, 2011).
The main FDI component in Malaysia include disposal of equity capital, reinvestment
earnings, and others. Over the years, FDI growth in Malaysia has incredibly increased where
between the 1970s and 1990s after the implementation of policy reform, the estimated FDI was

Foreign-Direct Investment and Economic Growth in Malaysia 4
about 94 billion dollars in total. However, during the 1990s, there was a fluctuation in the FDI
rate after the significant decrease of Taiwan and Japanese investors in the country. Also in the
2007 financial crisis, the FDI percentage was significantly affected by most of the blame focused
on the government inability to attract and sustain investors in the economy (Jensen, 2008).
Through the continuous increase in competition in the region, Malaysia has lost a considerable
large number of investors to neighboring countries such as India and China who provide more
interesting offers like the availability of cheap and ready labor. In the past decade, the FDI has
not been performing well where currently in the second quarter of 2018 it has reduced MYR
11.98 billion to MYR 2.84 billion.
Fig 1: Malaysia Foreign Direct Investment history (Jensen, 2008)
The significance of the Research
Today, FDI is considered one of the vital elements towards the aspect of continuous
modernization in industrialization and the improvement of economy in most nations. The FDI
has been characterized to contribute a lot to the economic sector in areas such as employment
creation and enhanced remuneration, foreign exchange earnings, and improvement in industry
skills. Countries such as China and India are some of the major nations which have significantly
utilized FDI as the main source of economy and society development (Alfaro and Johnson,
2012). The research analysis will, therefore, concentrate on reviewing and understanding

Foreign-Direct Investment and Economic Growth in Malaysia 5
prospects and preconditions fostering and inhibiting FDI performance in the country with also an
approach of improving the current poor situation.
Research Questions
The research will be based under several research questions which I intend to be
answered at the end of the report findings. Therefore, the main research questions include;
 Does the economy of Malaysia rely on FDI inflow in order to be stable?
 With the growth of FDI performance in Malaysia, will it also result in the same in the
country economic growth?
 What are some of the other effective methods other countries are using that might
improve FDI in Malaysia?
 What can be changed to improve current policy determinants in Malaysia?
Research Objectives and Framework
The main objectives of the research generally include;
 To investigate and analyze the key features between the relationship of FDI and
improvement of economic sustainability and development.
 To analyse the key FDI determinants in Malaysia economy and how to effectively utilize
the available resources for their improvement.
 To analyze the policy incentives history success and failures in Malaysia.
 Majorly, to improve personal understanding of the impact of FDI across various types
government structure with also various effective and competitive policy incentives.
Literature Review
Literature Review on Foreign Direct Investment (FDI)
FDI has been characterized as one the leading contributor in the economic development
of major host nations. This is through improvement of employment opportunities, source of
income, and majorly diffusion of technology in the host countries. (Wang and Wong, 2009). In

Foreign-Direct Investment and Economic Growth in Malaysia 6
the research analysis, there various means of analyzing the relationship of growth between
economy and FDI determinants of the host countries. Through the use of OLS regression and
cross-section data, countries which have applied import substitution strategy have reported poor
performance in FDI as compared to other countries which have opted to use export promoting
strategy (Meyer and Sinani, 2009). According to cross-sectional data, the bureaucratic efficiency
and degree of property right protection of the host countries can be directly correlated to the level
of host country capability where the two factors have very large significance in the improvement
of FDI. Example, through the increase of industry competition in China, the issue of property
right protection has been one of the key issues which have affected investors in the country (Yu
and Walsh, 2010).
In a comparison of developed and developing industry sectors, FDI has been observed to
play a very essential part in the dispersion of infrastructure and technology development in the
host countries. Also, the research also identified that countries which have chosen to increase
emphasis infrastructure and technology development also had increasingly positive improvement
in FDI especially with the availability of human capital (Azman-Saini, Baharumshah, and Law,
2010). Causality test is another one of the majorly used methods in studying the connection
between economic development and dependence with FDI. In accordance with causal effects
analysis, the development of economic growth and FDI should be treated individually. Unlike in
the view of economic development dependence to FDI for consistent growth, the causal effects
show that FDI is more dependent on sustainable economic growth. If the economy of the host
country fails or performs poorly, the FDI will also be significantly affected prior to the expected
correlation between the two. On the study, there is less supporting data to show FDI as the main
boost in economic growth but the results showed that it has also direct impact in the development
of the recipient country economy (Tiwari and Mutascu, 2011).
On the other hand, bilateral causality test has been proven the topic to be a very
diversified in understanding the relationship of the two variables and the major determinants.
The variation of the two variable is majorly characterized by the different time period and the
country’s economic environment (Omri and Kahouli, 2014). Most countries face a different kind
of issues and challenges which result to diferent kind of effects on the economy of the host
country. Example, in the research study done on Malaysia, Chile, and Thailand, they all

Foreign-Direct Investment and Economic Growth in Malaysia 7
exhibited different determinants of FDI which included different policy regimes, growth
patterns, and macroeconomic episodes (Karimi and Yusop, 2009). The study concluded that FDI
improvement in Chile was basically related to the country GDP while Thailand and Malaysia
portrayed a very strong correlation between economic growth and the direct impact it had to the
improvement of FDI. Malaysia economy also showed that causality in the country system
basically “moves from economic growth to FDI” which is unlike to the case of Chile where
“causality moves from GDP to FDI”.
As stated earlier, host country stability has a very important role on the FDI development.
For a better understanding of the determinants of FDI, Hufbauer (1966) product cycle hypothesis
in relation to trade theory is one of the best means of understanding trade theory and investment
theory (Demirhan and Masca, 2008). The theory focuses on investigation both export and import
products of the host country. Majorly, the researchers state that competition prices are of the key
features which attract investors to invest in any host country. Currently, one of the main cost
advantages which influence foreign investors in most countries is the issue of labor cost.
Through this, factors such as innovation have also been characterized to attract FDI which also
directly correlates to the improvement of the economy. By use of econometric methodology,
critical values such as “human capital development, environmental conditions, and financial
development”, are some of the elements which drive the economic growth in Malaysia and,
therefore, the encouraging FDI inflow (Pao and Tsai, 2011).
Literature Review on Economic Growth in Malaysia
Export growth is considered as one of the common determinant elements of FDI in most
of the recipient countries. Through the increase in export, the host country is considered to
benefit in some of the various ways which include an increase in capital efficiency, non-export
production of goods, ability to handle external shocks, income, and other external challenges
(Büthe, and Milner, 2008). With this in mind, export has been considered as one of the best
strategies for improving the economic development and most particularly in emerging market
sectors. However, through the use of ‘data series from 1966 until 1988, export was found as not
the only major determinant factor in the economic growth and increase in FDI (Lau, Choong,
and Eng, 2014). The four major countries which were part of the data series, i.e. Malaysia,
Thailand, Singapore, and the Philippines, showed in the report that both export and economic

Foreign-Direct Investment and Economic Growth in Malaysia 8
growth depend on host country policies. The report also stated that economic development is the
major boost in export growth unlike the other way round.
Through the empirical analysis prepared by cross-country data “1975 to 1995”, it was
identified that FDI has a vital role in the change of the economic growth of more than 70 nations
which were considered as a part of the study. The research stated that countries with good and
sustainable financial stand had more advantage in the utilization of available FDI. One of the
main factors which have been considered as direct impact to FDI in most of the countries was
labor cost (Anwar and Sun, 2011). Developing countries are one of the majorly attractive
destinations to most of the investors due to the availability of human capital which is a
significantly contributes to the improvement of the economy. Countries with a lack of technical
knowledge are considered as one of the negatively affected in the FDI inflow. The developed
countries with enough technology and information resources have been described for effective
utilization of FDI in the countries. Therefore, the capability of the recipient nation to utilize the
advantage of the FDI can be majorly characterized to be limited to local environmental factors
such as infrastructure and education (Giuliano and Ruiz-Arranz, 2009).
Through the analysis done to investigate the long-term and Short-term economy effects
from FDI showed that it has a direct impact on GDP and an indirect impact on exports. The two
variables can also be considered to be bilateral causal. Example, countries which can be able to
take advantage of the FDI are considered to have more overall growth in the entire economy
(Alfaro and Johnson, 2012). In the case of Malaysia, through the use of “annual time series data”
research from 1960 to 2005, it was concluded that GDP growth was one of the factors which led
to the improvement FDI inflow. Over the past years, the generation of income in Malaysia has
been widely increased with increase in FDI inflow where over 10% of the total 2017 revenue
was contributed by FDI.
According to Ang (2008), with the increase in globalization and competition among
countries, financial development channel is considered as one of the key features which attract
growth in a country. Through technology change, the recipient countries are also able to enjoy
benefits which are a result of technological spillover. Financial development channels are
therefore considered very important in the technology spillover since it's considered that without
stable or minimum threshold in the financial background of the host country, technology

Foreign-Direct Investment and Economic Growth in Malaysia 9
spillover cannot occur (Tang and Tan, 2014). The more effective the system is, the better the
host country will be able to manage the investment. Financial systems can also be considered as
determinant tools in the analysis of innovation in the country and rate of technology spillover
(Holmes Jr, Miller, Hitt, and Salmador, 2013). Therefore, FDI and financial development can be
considered as dependent unlike in the case between FDI and human capital which are
independent of one another.
According to the above literature review, the relationship between the two variables
growth can be ‘perceived’ in the various perspective of the economy. Majorly, the correlation of
FDI with most of the determinants is considered as indirect and independent of the factors such
as labor which is also a significant competitive advantage (Denisia, 2010). Through the
interactive and time series models, the body of the literature has critically analyzed the
relationship between the two variables of the recipient countries. Analysis of major determinants
of FDI such as financial development, human capital, and other environmental factors has also
shown their importance in promoting FDI inflow in Malaysia which is also has a significant
impact on the country economic development. This also concludes that the situation of a country
can significantly affect FDI inflow thus in line affecting economic growth (Sbia, Shahbaz, and
Hamdi, 2014).
Research Methodology and Design
Data Resources
The main distinction point between primary data is that it’s the information that is
collected to answer specific research questions while secondary data is a collection of previously
recorded data used to answer research questions. According to this research, secondary data has
been chosen as the main research data due to a number of reasons. This includes that secondary
data is more widely available, it's cheap and easy to access, unlike primary data which also
consumes a lot of human labor. Through the interpreted information, gathering information for
research was more easy and efficient. This was a majorly very effective in-depth analysis of
Malaysia FDI history and in regards to also quality data for even current situations. Some of the
major secondary sources that were used include books, articles, newspaper, journals, articles, and
internet.

Foreign-Direct Investment and Economic Growth in Malaysia 10
Data Analysis Method
As stated earlier, the data used during the research was secondary data which saved a lot
of cost and time. Through the school library and e-learning provision, the availability of data was
widely available which was also more convenient in the limitation of space and time. The
internet was also another important part of the research where sources such as journals and
articles were in abundant. The school websites access has also played a major in the research
where one can be able to access a variety of information without any challenges. The analysis
and collection of data were mainly done through reading, comparing data, and writing notes. The
only challenge encountered was the use of library textbook which had limited information
content answering the research questions.
Hypothesis
Null Hypothesis
H1: FDI does not have a vital role in the technology distribution in the recipient country
Alternate hypothesis
H2: FDI has a vital role in the technology distribution in the recipient country
Technology growth is considered as one of the main aspects of economic growth in most
of the developed and developing countries. Through the technology advancement, other sectors
of the economy such as health, education, transportation can be significantly boosted in various
ways which generally involve innovation and improved capability in research (Ang, 2008). The
diffusion of technology is considered to take place in presence of four major features which
include the availability of human capital, foreign technology adoption, high technology imports,
and new innovation and ideas. Therefore, the diffusion of technology into the host countries will
highly depend on the above key features which also describes the economy level of recipient
countries. In the literature review, human capital has a very significant positive impact in FDI
inflow where through technology a lot of economy aspect of the recipient countries can be
enhanced (Liu, 2008).
Null Hypothesis
H1: Economic growth does not impact any positive attraction of FDI.

Foreign-Direct Investment and Economic Growth in Malaysia 11
Alternate hypothesis
H2: Economic growth has a great impact on any positive attraction of FDI.
Currently, economic growth and development is one of the priorities in most of the
countries today. A stable economy of country portrays a very important and good image to other
countries which in turn attracts a lot of foreign investors who with their investment also generate
income for the host nation, therefore, boosting its economy (Alfaro and Charlton, 2009). The
economy determinants such as domestic consumption, government expenditures, exports, and
exchange rates should be keenly reviewed in the approach of FDI enhancement. The main
determinants in Malaysia economy include domestic consumption and exports. Therefore, the
economic growth of the recipient country has a very important role in the attraction and increase
of FDI.
Limitations
One of the main challenges that were encountered during the research was the lack of
enough reading materials regarding the research topic in the school academic library. Also, some
of the sources used did not have a clear dataset as compared to other data which caused a lot of
challenge during the analysis. The research on Malaysia determinants was not effectively
covered in most of the resources and in ways which they affected FDI inflow into the country.
Most of the theoretical models used by various researchers in measuring the two variable were
perceived to be very obsolete in comparison to the recent data analysis techniques. However, the
analysis of the research question was not fully covered as it should be since the research proposal
still requires teacher opinion.
Ethical Considerations
Some of the main ethical considerations included the ability to maintain respectful space
and making sure there is no violation of human rights. This is through providing the required
details which include the aim of the study and mainly their will to participate in the research. The
individuals on the research have also the permission to withdraw from the research participants
and that their personal details are completely protected. Also, the issue of work ethic was
majorly utilized during the secondary data research. To avoid this issue, the use of proper
citation of the entire research was effectively carried out.

Foreign-Direct Investment and Economic Growth in Malaysia 12
Expected Outcomes
The research proposal is based on understanding Foreign Direct Investment and its
significance in the economic development of major host countries i.e. Malaysia as the focus of
the research. Through the continuous changes in internationalization and political capability of
different countries, the economic growth and impact of FDI have been characterized to be
affected by various factors (Almfraji and Almsafir, 2014). In this, the main expected outcome of
the study is the significant influence of the government action in the promotion of economy and
FDI improvement. With the significance of Malaysia economic stability, there are various
advantages in the country which can be utilized to promote FDI inflow in Malaysia.
Timeline and Gantt Chart

Foreign-Direct Investment and Economic Growth in Malaysia 13
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Foreign-Direct Investment and Economic Growth in Malaysia 15
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